Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
Delicious Bakery – Egypt
Prepared by Juliet Bailin, Maya Dadoo Gonzalez, Rhett Morris and George Foster
Delicious Bakery was founded in 2008 by three graduates of the American University in Cairo – Basel Mashhour, Tarek El Nazer and Sameh El Sadat. Delicious Bakery is the first high-end, artisan bakery to target Egypt’s upper class with fresh bread, croissants, pastries and sandwiches – goods usually associated with Europe. To build a more scalable company, the entrepreneurs expanded in the first three years to have three sales channels: retail stores branded as The Bakery Shop (TBS), serving a full range of products and drinks; “Delicious Bakery” corners in supermarkets; and a business-to-business (B2B) service, which provides bread to Subway and other restaurants.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable, growing company? How did it change over time?
“The three of us had been bouncing ideas around for years. In February 2008, we decided to open an upscale bakery shop – a business with low entry cost and high margins. This specific segment was chosen after we identified a need in the market. Initial success was defined by us as proving the concept, achieving growth and seeing the products selling well. The concept was still new – there were some random bakery places – but our concept was offering fresh products out of the oven. Would consumers appreciate the value added and pay a premium for it?
“A key challenge was not knowing the bakery business. We set about learning the business from scratch and spent five days living at El Sadat’s family hotel learning the baking process from the kitchen’s professional bakers. By the end of February 2008, bread-making machinery had been purchased and a head baker hired. We visited a bakery exhibition in Paris in March 2008. As we could not afford to rent a high-end location in Cairo, we opened a seasonal shop during the summer in the North Coast, a popular vacation spot for Egypt’s upper class. Featuring a kitchen visible from the street and fragrant bread coming out of the oven, the shop was an instant success. We preached: ‘Fresh-baked products… baked in front of you.’ It served 200 customers per day and earning US$ 50,000 in just three months. The three of us returned to Cairo at the end of the season determined to open a shop in the city.
“We realized once we started that our key threshold was to scale successfully and to ensure that our operational model worked in a scalable format. When we started the business, we thought the gap in the market would allow about 20-30 ‘The Bakery Shop’ stores in Egypt. So far, we have nine shops (all in Cairo). However, we were most likely targeting less than 2% of the population. After one year of operation, we created a second brand (Delicious Bakery) that targeted the bigger middle-income market. The two main sales channels for this brand were: a) in supermarkets, as they outsource bakery operations; and b) standalone shops that are opened in middle-income districts. By mid-2013, we had successfully opened seven Delicious Bakery shops all over Cairo with a plan to roll out up to 40 stores over the coming 3-5 years. In the second year, we also broadened to add a third target market – the B2B market that supplies bakeries to cafés, restaurants and hotels. After five years of operation, we are now looking at adding a semi-industrialized bakery production activity that could cater for the three current revenue streams – TBS, Delicious Bakery and B2B.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
El Sadat: “Major growth accelerators have been identifying prime locations, maintaining a high quality of ingredients, hiring, training, retaining and incentivizing our people and, last but not least, our partnership with Delicious Inc. (a different company than our Delicious Bakery). The three of us had no background in the baked products field. We spotted an opportunity in the market, jumped in, worked hard and put our best efforts on the table. But we have benefited greatly by hiring employees fresh out of school, and ensuring they get the right training to cater for the target customer we look to serve.
“The three of us debated a lot about whether to partner with Delicious Inc. Delicious Inc. is still the owner of the biggest coffee shop chain in Egypt, Cilantro. They have been operating in the market for the past 10 years and have expanded the business reach to having more than 60 coffee shops last year. Many people advised against the partnership. But is has worked very well. We have been able to leverage Delicious Inc.’s operational platform. We have been able to leverage their existing platform to supply bakery products, leverage their real estate muscles, and benefit from synergies gained from sharing all their back office operations (such as the finance department, IT, HR, etc.). They were a huge added value with regard to those areas.”
Mashhour: “One major growth accelerator was introducing the second-tier brand in the second year of operation. After fully understanding the TBS concept/brand, we (the three partners) realized that TBS, being a premium brand serving the upper segment of Egypt, had limited growth; hitting a critical mass could only be through Delicious Bakery. Delicious Bakery took the company from niche to mass, from high margin-based operations to a healthy margin/volume mix. Had Delicious Bakery not been introduced, the company’s potential in terms of annual revenues and, more importantly, the number of employees would have been limited.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
El Sadat: “The promising consumer story in Egypt. We recognized a niche market – the need was there. Over time, we expanded into a broader set of areas to expand our accessible markets.
Availability of workforce/human capital. The people with expertise we hired, as well as the managers at Delicious Inc., were crucial to early growth.
Availability of funding/finance. We received an equity investment of US$ 500,000 from Delicious Inc. This was used in part to build out our first permanent TBS in Zamalek and invest in a well-equipped facility to produce consistent quality products.
Availability of mentors and advisers. Delicious Inc. provided advice through us working with their multiple departments, from IT to HR to finance. We have also gained from mentorship organizations such as Endeavor. Our mentors have also helped us refine our business model.
Level of education and training in the region. Private university graduates are generally looking for white collar jobs (accountants, etc.) rather than to work as salespeople in our shops. Egyptian public universities are the main source of our employment. While this means less quality education, those students are the ones looking for jobs such as cashier at a shop. It is challenging to find well-trained employees; we have had to do a lot of internal training.
Cultural and societal support and respect for entrepreneurship. This is a challenge in Egypt. People are afraid to start their own businesses because they are afraid to fail. It is a matter of mentality. Entrepreneurs are the only people that will remove the stigma of failure in this region.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges.
El Sadat: “Availability of market intelligence and data points to support decision-making – access to market intelligence and coverage of sectors is something that is missing in terms of research material and availability of data points that can help us build decisions on.
“Availability of financing – even though banks have been promoting small and medium-sized enterprises, their internal credit approvals are still very restrictive for small companies to get access to funds.”
Q5: Large companies can play an important role in scaling up early-stage companies with high growth aspirations. This role can include being a customer, supplier, marketing partner, joint venture partner and so on. (a) Describe the key areas where interaction with larger companies helped promote your growth path.
El Sadat: “In October 2008, we decided that the American University of Cairo would be the ideal first location. However, we encountered a road block. Delicious Inc. owned the food and beverage rights at the university. Delicious Inc. was the largest coffee shop operator in Egypt. Rather than walking away, we sought to partner with them. In February 2009, Delicious Inc. signed a deal to provide capital, operational knowhow, business development expertise and human resource support in return for 51% of our nascent business. In October 2009, this investment helped us to open in prime locations that were not as profitable under the Cilantro brand.
“Delicious Inc. helped us on various fronts, but most important is that they shortened the timeline of our learning curve. We were able to get access to their platform of more than 60 coffee shops to roll out our products, and access to real estate locations. We were also able to acquire some Cilantro coffee shop locations and turn them into profit-making TBS shops.”
El Nazer: “In our case, our partnership with Delicious Inc., the larger company, was highly productive. They played multiple roles to scale the business, starting from customers, having shops that we supplied all bakery goods to from day one of operation, to suppliers by benefiting from all synergies in warehouse and long-term contracts.”
(b) Describe the challenges and potential problems that larger companies may have played in limiting the growth path of your company.
El Sadat: “One challenging aspect of negotiating with a larger company was getting agreement from both sides on the terms of any exit by us as shareholders from the business. There is a cycle to brands in Egypt (as well as everywhere in the world). We wanted to get the right formula for us to exit at the right time. Given our current growth potential, this matter is still far from where we are today. But we did manage to include exit terms in our agreement with our partner to allow us both to exit the business at the right time.”
Q6: Your revenue growth to date has been focused predominantly on the domestic market. What are the main reasons for this focus?
El Sadat: “In 2008, the market in Egypt was underserved and we had a first-mover advantage. We grew to 15 stores and there is still room for growth. Egypt has a population of 90 million. There is a growing urbanization trend and people consume a lot of food outside of their homes. Disposable income is rising, with high income earners looking to spend it on quality products, which are rarely found in Egypt. We focused in our early days on the local market to serve this need. By expanding to three product areas, we increased the ability of our domestic market to provide continued growth.
“We are now looking to establish our presence in other markets. We see similar gaps that can be filled. Recently, we started preparing our internal processes to expand outside of Egypt on a franchise model basis. I am now based in Dubai. We are in talks with potential partners in Saudi Arabia, Tunisia, Libya, Turkey, Qatar and the UAE. Most of our potential partners in these markets have retail experience and they see a demand for bakery products in their countries.”
Q7: What would you view as the greatest challenges in growing a sizable revenue presence in markets beyond your own domestic country or region? In deciding when and where to seek growth in international markets, what characteristics of a country’s ecosystem would be most important in attracting you to invest significant resources in that non-domestic country or region?
El Sadat: “We are building relationships with different people in different countries. We need 3-6 months to be ready to roll out a plan outside of Egypt and to ensure that the model would work in those countries. We do not want to rush. We want brand recognition. There are at least three key challenges to entering new markets: 1) finding the right partner and having leverage on the operation through a strong quality control team; 2) preparing the company with the right scalable model that would allow it to be a simple plug-and-play model that offers the required returns for the partners; and 3) upgrading the offering of products to adapt to the locality of the markets we are planning to penetrate.”
Q8: Building a company that aims to have sustainable high growth inevitably will have both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in your entrepreneurial journey.
El Sadat: “A low moment was during the first year after we sold a 51% interest to Delicious Inc. We had a lot of people tell us that we shouldn’t have done it. We were only 23 years old and had limited experience on ways to maximize the benefits of the relationship. It took us two years to fully digest that we had a partner on board that we could leverage in multiple ways.
“A high moment was when we approached potential partners on a regional level with our track record, and we realized that we have a brand that has all the ingredients and track record to move from being a leader in the local market to becoming a regional champion.”